Market Data for the quarter ended March 31, 2021:
- S&P 500 Stock Index: 3973, up 5.8%
- Ten-year Treasury Note Yield: 1.75%, up 0.83%
- Gold: $1,708 per ounce, down 10.0%
- Oil: $59 per barrel, up 20.4%
Stocks and industrial commodities, such as copper and oil, continued to rally in the first quarter of 2021, while more defensive instruments, such as long-term Treasury securities and gold, fell significantly. The underlying narrative driving markets was that between continued significant monetary policy support from the Federal Reserve, massive fiscal stimulus from the U.S. Treasury, and the widespread distribution of vaccines, the U.S. is looking at a roaring economy for the remainder of 2021.
Whether or not this turns out to be the case remains to be seen.
The Covid-19 pandemic is not yet under control, and it is by no means certain as to when control over it will be established. Until the virus is contained, full economic reopening will be delayed, and expectations for a strong economic recovery may not be realized. We are not making a prediction on the path of the virus, but rather making it clear that the current market narrative is not destiny.
As far as the impact on markets is concerned, our view may seem counterintuitive. If the pandemic is brought under control, and the economy stages a strong recovery, we see financial assets coming under pressure across the board, as the liquidity that has built up in financial markets over the course of the pandemic rushes into the real economy. Conversely, if the pandemic cannot be effectively brought under control, and economic reopening is delayed, liquidity will remain trapped in financial markets, and financial assets will remain well supported.
Whatever the case may turn out to be regarding the path of the virus, from a longer-term perspective, stock valuations on an absolute basis are at their highest level since March of 2002 and at their highest level relative to long-term Treasury yields since September 2007. While valuation does not typically make for an effective market timing tool, it is worth noting that the previous instances of elevated valuation cited above were both followed by significant declines in share prices over the subsequent 12 to 18 months. A major correction in share prices over the next 12 to 18 months is not our base case. However, investors should lower their stock market return expectation for the coming decade given the current elevated valuation backdrop.
Having not fully participated in the market fireworks of the past twelve months, we expect that our high-quality dividend growth strategy is favorably valued relative to the broader market and should enjoy both absolute and volatility adjusted outperformance in the years ahead.
For the remainder of the year, we see the United States stock market, as represented by the S&P 500 stock index, trading in a range of 3500 to 4200. It closed the quarter at 3973.
We appreciate the trust and confidence you have placed in us. We are always available to discuss your asset allocation and the investment environment more broadly, so do not hesitate to contact us with your questions and concerns.